German Chancellor Angela Merkel and French President Emmanuel Macron presented a joint Franco-German proposal on the European recovery from the coronavirus crisis on 18 May 2020. The main aim is to set up a €500 billion Recovery Fund at EU level for solidarity and growth, managed by the EU Commission.  The funds are to be distributed in as grants among the EU Member States that have been most severely impacted by the COVID-19 pandemic, with payments made from the EU’s overall budget.

The proposal allows the European Commission to finance economic recovery support by raising funds on the capital markets on behalf of the EU, ‘subject to a legal basis that fully respects the EU Treaty and budgetary framework as well as the rights of national parliaments of the Member State’.  It will be a complementary derogation, anchored in the EU’s Own Resources Decision, with a clearly defined scope and time limit and linked to a binding repayment schedule beyond the current Multiannual Financial Framework, via the EU budget. This €500 billion would be on top of the 2021-2027 EU budget, which will be worth close to €1 trillion in total. This large grant injection is also intended to address concerns about the inability of certain EU member countries to support their industries through the crisis, whilst bigger countries can offer massive financial assistance for national major industries.

It is envisaged that the Recovery Fund of €500bn will:

• Provide EU budgetary expenditure for the most affected sectors and regions on the basis of EU budget programmes and in line with European priorities. It will increase investments in particular in the digital and green sectors and strengthen research and innovation;

• Be targeted at the challenges of the COVID19 pandemic crisis and its aftermath; and

• Complement national efforts and financial packages already available from individual Member States.

In addition, there is an intention to modernize and grow the European economy using the European Green Deal as the blueprint and growth strategy.  The aim  is to build a prosperous and resilient economy with a view to achieving carbon-neutrality by 2050. At the same time, there are plans to build on lessons learned from the pandemic by accelerating growth in digitalization, i.e by rolling-out 5G, combining efforts for secure and trustworthy infrastructure and cybersecurity technologies, digital identity management, an enabling framework for AI, as well as fair EU regulation for digital platforms. The proposal  highlights open markets, free and fair trade as being a crucial part of enhancing EU economic and industrial resilience. There will therefore be a focus on:

• Diversification of supply chains through an ambitious and balanced free trade agenda with the WTO at its core. There will be new initiatives surrounding trade of health products, development of anti-subsidy mechanisms (surrounding financial contributions made by government or public bodies), ensuring effective reciprocity for public procurement with third countries and strengthening EU and national investment screening towards non-EU investors in strategic sectors (including health – pharmaceuticals, biotech etc.). There will also be measures aimed at encouraging investments (re)located in the EU;

• Adjustment of the European Commission’s industrial strategy to focus on the recovery and modernization of European competition policy. This will be achieved by accelerating the adaptation of state aid and competition rules and speeding up the implementation of IPCEIs (the Strategic Forum for Important Projects of Common European Interest);

• Ensuring a swift return to a fully functioning internal market. There is a new roadmap to further enhance the internal market, by creating a fully integrated market in key areas (especially digital, energy and capital markets) with clear milestones and an accelerated legislative agenda;

• Ensuring the full functioning of the Schengen area, improving coordination obligations between Member States in times of crisis and strengthening common external borders; and

• Reinforcing social convergence and speeding up the discussion on the EU framework for minimum wages, adapted to each nation.

Further, France and Germany both strive for a strategically positioned European healthcare industry which, in full respect of the Member States’ responsibility for their social security and healthcare systems, intends to upgrade the European dimension of healthcare and reduce EU dependency.

Although the €500 billon will be part of the EU budget, it is likely to be spent early in the next budget period from 2021 to 2027. There are different options for dealing with the debt load created by the Recovery Fund- it could be paid back over a long period, or continuously rolled over. As described by Angela Merkel, the Franco-German proposal would mean that the debt servicing (the repayment of interest and principal) would be done through funds allocated to the EU through contributions from the Member States, based on their share in the regular EU budget. This would mean that e.g. Italy would need to contribute around 15 per cent of these new liabilities. Although, this technically increases the Italian state’s liabilities by around €75 billion, accounting rules mean that this will probably remain off the state’s balance sheet and thus not increase its headline debt to GDP ratio.

The Franco-German proposal will need agreement from the other 25 Member States.  It remains to be seen whether all Member States of the Eurozone and their parliaments will agree to the proposal. Already on 23 May 2020, Austria, Sweden, Denmark and the Netherlands have unveiled their counter-proposal to the Recovery Fund proposal, reiterating their position on the provision of cheap loans to finance the bloc’s recovery from the Coronavirus crisis (see https://euractiv.bg/wp-content/uploads/sites/9/2020/05/Frugal-Four-Non-Paper.pdf). The countries counter-opposed “favorable loans” for those most severely affected by the crisis, but no grants, no debt mutualisation and no significant increase of the long-term EU budget, namely the Multiannual Financial Framework (MFF) for 2021 – 2027.